August 03, 2018
03 August 2018
What we know
We’ve certainly become accustomed to nasty surprises when it comes to the local currency and this week ended up being pretty disappointing. Most commentators, including ourselves, were hopeful that the ZAR was gearing up for a move towards the 13.00 level as a result of the resilience it’s shown of late, positive momentum and an easing of trade war and global risk concerns.
As it turned out it was not to be; having started the week just below 13.20 and touching 13.08 on Tuesday, a number of factors contributed to us selling off to above 13.50 at our worst levels. While the big issue was unquestionably the ANC’s decision to amend the constitution to allow for expropriation of land without compensation, there were many other important news and data releases that the currency market needed to digest:
- SA second quarter unemployment increasing by 0.5% compared to Q1 and consensus;
- A positive surprise in SA’s Balance of Trade surplus;
- A spike in the trade wars threat with the US claiming they may double proposed tariffs on $200 billion of imports from China;
- The Turkish Lira traded at record lows vs the USD (now down 34% YTD) as the US sanctioned two of their ministers over the continued detention of a US pastor;
- Regional turmoil, with the chaos and controversy surrounding the Zimbabwe elections;
- Fairly uneventful announcements by the Fed (US rates unchanged) and BoE (rates hiked by 0.25%), which while expected, still hint towards tightening monetary policies which would likely be negative for emerging market currencies.
Coming back to the main local headline, there are mixed interpretations about what the ANC statement implies. Taking the most bearish view raises fears that the EFF will now be emboldened to put more pressure on the ANC to make more amendments down the line, with the precedent having been set and the EFF claiming victory for the pressure they’ve applied.
Others see it as a fairly logical and predictable strategic move by the ANC to draw support ahead of next year’s elections. A more middle-of-the-road view could be that this is an inevitable and necessary move towards greater equality and wealth generation in the long-term, with short- to medium-term pain being unavoidable – with this stance the main concern shifts to when and how this process plays out.
We tend to lean towards the latter scenario, given that the announcement brought very little news to light, as the likelihood of this happening has been known since late 2017. We aren’t downplaying the significance of the situation, but rather suggesting that for the time being little has changed, other than increased uncertainty and fear around possible worst-case scenarios.
Uncertainty and fear will, of course, lead investors to turn more bearish on the ZAR outlook. Nevertheless, the price action post the announcement was interesting, as after losing over 2% against the USD, the ZAR recovered most of the losses by Wednesday’s close, supporting the view that there wasn’t in fact too much that could be gleaned from the ANC decision. Thursday, however saw further weakness, with the ZAR touching 13.50 and struggling to recover off those levels.
Given all the above, and considering the ZAR’s performance compared to its emerging market peers over the past few days, weeks and months, we are of the opinion that the sell-off this week is due to a combination of the land expropriation issues, emerging market weakness and a general risk-off approach, rather than simply a reaction to Cyril’s comments.
What others say
30 July 2018
Eye Witness News – #RandReport: Rand Grinds Out Gains, Stocks Also Up
“While rand volatility is likely in third quarter 2018, particularly if US-led trade and geopolitical tensions flare up again, the domestic currency could prove less volatile than in the second quarter as significant portfolio rebalancing has already occurred,” said economist at Investec.
31 July 2018
Nedbank – Special Report: The US Dollar Is More Important Than You Think
“Should Global $-Liquidity and Global financial conditions fail to improve or even contract further we can expect a deflationary environment to materialise. In this environment we prefer to maintain defensive investment portfolios, i.e. Cash over bond over equities… We cannot stress enough the importance of the 95 level on the US Dollar index. A confirmed break above this level will mark the beginning of the next risk-off phase… Given our concern regarding the outlook on global $-Liquidity and our inter-linkages with global capital markets we cannot envisage a robust environment for asset returns and economic growth to materialize.”
Financial Times – Emerging Market Wobbles Create Buying Opportunities, Analysts Say
“A shakeout in emerging market equities has created value in a world where good quality value is scarce”. While “tail risks” have increased for EM stocks, “we believe current valuations and strong earnings growth offer investors ample compensation for these risks.” said Richard Turnill, global chief investment strategist at BlackRock, the world’s biggest money manager… Alessio Rizzi, portfolio strategist at Goldman Sachs, offered a similar opinion: “We continue to like EM equity as we think it has priced enough growth slowdown relative to incoming data which shows some recent improvements.”
01 August 2018
Fin24 – Big Blow For Rand, Economy As ANC Set To Change Constitution On Land
“This is a surprising and premature announcement by the ANC because parliament is still in its review process on changing the constitution… Parliament still has to gather and evaluate the many submissions that have been made. We are in a pre-election phase and the ANC announcement is part of that,” executive director of the Council for the Advancement of the South African Constitution told Bloomberg.
02 August 2018
CNN Politics – US Threatens Raising Tariffs To 25% On $200 Billion Of Chinese Goods
“China’s position is firm and clear cut,” Shuang told media at a regular press briefing in Beijing. “It remains unchanged. The blackmailing and pressure by the US will never work on China if the US take measures to further escalate the situation we will surely take countermeasures to firmly uphold our legitimate rights and interests.”
Investec Corporate & Institutional Banking – Land Expropriation Issue Affects Rand
“Naturally the rand has reacted to the news that the ANC will go ahead and amend the constitution to allow for land expropriation without compensation. At least we have clarity on this, but we are still lacking any material detail… I have to say that a move from 13.1000 to 13.3000 (although we did touch 13.3750 briefly) is not that extreme in the grand scheme of things. After all, we were above 13.7000 not that long ago. However the rubber has to hit the road somewhere, and I am not that certain that the current risk premium is high enough. Of course as usual I’m referring to the medium to longer term. In the short term it will remain fluid and volatile.”
03 August 2018
Bloomberg Markets – Stocks Mixed After Rough Week; Italian Bonds Slump: Markets Wrap
“Trade manoeuvring kept markets on the back foot this week, with China’s move to strengthen the yuan and the Trump administration’s unpredictability on tariffs overshadowing a mostly positive earnings season and an upbeat assessment of the American economy by the Federal Reserve on Wednesday.”
What we think
Last week we wrote that “In the absence of any major news or economic developments, we continue to anticipate further consolidation around these levels in the coming days. Thereafter we believe that a re-test of 13.10 will set up a move to 13.00.”
Well unfortunately we couldn’t avoid the major news, which for the short-terms seems to have put paid to recent trade patterns and the likelihood of testing 13.00. Rather, the depreciating trend that we’ve seen since late March now appears set to remain entrenched – we would have needed a decisive break through 13.10 to start considering whether that trend had been broken.
Although the technical charts are somewhat less supportive following this recent move, we are still not anticipating a major sell-off as things stand. The 13.51 level has held well over the past two days and a close today below the 13.30 level (13.33 as at the time of writing) could see us pull back into a 13.15 – 13.25 range and put a test of 13.10 back on the cards.
Still we cannot ignore global market conditions and some of the jitters being experienced both locally abroad. Should sentiment take a further knock in the near-term, we’d look to 13.62 as a possible downside target. As such, our range for the week ahead is 13.20 – 13.62.
Have a great weekend!